Proof of a material change in risk due to alleged affiliation with criminals requires evidence going beyond speculation

Insurance law – Property insurance – Arson – Evidence – Landlord and tenant – Material change in risk – Failure to notice – Practice – Appeal

Wynward Insurance Group v. Smith Building and Development Ltd., [2023] S.J. No. 178, 2023 SKCA 57, Saskatchewan Court of Appeal, May 12, 2023, L.M. Schwann, J.A. Tholl and J.D. Kalmakoff JJ.A.

The insured owned a commercial building which was destroyed by fire in April 2016. The insured leased the premises to a tenant who subleased a portion of the building to a motorcycle club in 2012, without a formal sublease agreement. The fire which destroyed the building was arson and was started when someone smashed a window into the motorcycle club’s portion of the premises.  A plastic jerry can containing an accelerant was found under the collapsed roof.  The insured made a claim for the fire loss.  The insurer investigated and determined, based mainly on a number of general newspaper articles about motorcycle gangs in Saskatchewan, that the motorcycle club was affiliated with the Hells Angels. The insurer determined this constituted a material change in risk that had not been reported, and also that the insured had not provided the insurer with the details of the subleases. The insurer denied coverage.

The trial judge found that there was no material change in risk and ordered the insurer to cover the loss.  The insurer’s appeal was dismissed by the Saskatchewan Court of Appeal.

The insurer argued that the trial judge made three errors: first, in ruling that a witness sought to be called by the insurer as a participant expert could not give expert opinion evidence; second, in finding no evidence of material change in risk; and third, awarding replacement cost coverage.

On the first ground, the insurer had applied to call a witness to give expert opinion evidence on the affiliation between the motorcycle club and Hells Angels, without providing notice to the insured as required by the rules of court. The trial judge found that the witness was an independent third-party expert and notice had to have been given.  The Court of Appeal determined the trial judge made no error and the decision was entitled to deference.

On the second ground of appeal, the court upheld the trial judge’s conclusion that the insurer had tendered insufficient evidence to discharge its burden of establishing that a connection between the motorcycle club and Hells Angels created an elevated level of risk that was material to the insurance contract.

On the last ground, the insurer conceded there was no error to award replacement cost coverage but argued that there was an error in holding that the insured was not required to rebuild within a reasonable period. The appeal court disagreed on the basis that there was no replacement cost provision in the policy and further, the trial judge’s finding that the insured would have rebuilt if he had the funds available under the policy was a finding of fact entitled to deference.

This case was digested by Mark A. McPhee, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Mark A. McPhee at [email protected].

To stay current with the new case law and emerging legal issues in this area, subscribe here.